A Medical Emergency

November, 2001

On Nov. 1, the professional services firm Ernst & Young is scheduled to release its second update of its study on Medicare and Medicaid reimbursements and the financial impacts on Hawaii’s hospitals and nursing facilities. If the study’s findings are anything like the original report released in November of 1999 or its first update (December 2000), the prognosis for Hawaii’s healthcare facilities looks grim.

The report was commissioned to measure the impact of the massive cuts in Federal Medicare and Medicaid reimbursements instituted by the Balanced Budget Act (BBA) of 1997. At the time the industry was still reeling from tens of millions of dollars spent on Y2K compliance, as well as growing pharmaceutical costs and increased consumer demand for technologically advanced treatments.

While federal cuts are affecting hospitals across the nation, they may be the final straws that break the back of Hawaii’s hospitals that already have been crippled by the state’s decade-long economic slump. And while Y2K has come and gone, other administrative and technological challenges remain, such as meeting the requirements for the Health Insurance Portability and Accountability Act (HIPAA). The cost of complying with HIPAA, which among other things accelerates the move from paper-based to electronic transactions, is estimated to be five times the costs of Hawaii’s Y2K compliance. And if that wasn’t bad enough, the recent mass layoffs (and the resultant loss of health benefits) in the tourism industry and throughout the state’s work force will put further pressures on a system on the brink.

The Balanced Budget Act of 1997 was signed into law by President Bill Clinton on Aug. 5, 1987. A bipartisan effort to balance the federal budget by 2002, the budget act contains the largest reductions in federal Medicare in the program’s history: $116.4 billion over five years. Medicaid also will see similar traumatic cuts in spending, $17 billion over the first five years for a total of $61.4 billion over 10 years.“This year will be the most critical year in the history of healthcare in Hawaii,” says Richard Meiers, president and chief executive officer of the Healthcare Association of Hawaii, whose organization commissioned the Ernst & Young study. “It has hit us worse here because we never recovered from the recession of the 1990s. We used to be the ‘Health State’ with rates of the uninsured ranging from 3 to 5 percent. Now, we are in the double digits and we’re only going to get higher.”

In Hawaii, according to Ernst & Young’s report, 16 hospitals, including the hospital-based skilled nursing units and five freestanding nursing facilities, suffered $14.3 million in cuts in Medicare reimbursements in 1998, $27.8 million in 1999 and $31.8 million in 2000. By 2002, over a five-year period, these facilities will have had to withstand approximately $142 million in cuts.

The reductions have been particularly tough on Hawaii, which pays a “paradise tax” of sorts when it comes to healthcare: A higher cost of living means a hospital cost per day that is 6 percent higher than on the national average and a cost per discharge that is 17 percent higher. Another factor that increases costs is that in Hawaii the average length of stay is higher than the national average, 8.6 days in 1997 and 7.9 days in 1998 compared to 7.3 and 7.2 days respectively. Also, Hawaii continues to receive less in Medicare payments per enrollee than the national average. In 1998, only 11 states had lower Medicare payments per enrollee. Meanwhile, according to Health Trends in Hawaii, the rate of uninsured residents in the state rose from four percent in 1995 to seven in 1997 to 11 percent in 1999.

“When people here get sick, they tend to get really sick,” says Raleigh Awaya, chief business officer of St. Francis Healthcare System. “Secondly, the financial resources of many of our residents aren’t as deep as patients on the mainland, where the cost of living isn’t as high. Therefore, they quickly go onto Medicare. And then using all their assets and going to Medicaid.” As a result, the bad debt and charity care costs at Hawaii hospitals have steadily increased from $52.1 million in 1998 to $70.4 million in 2000. By 2002 that number is expected to grow to $75 million. “There is no industry that can absorb these kinds of enormous cuts,” says Meiers. “It is illegal and immoral for hospitals to continue to pick up the bill.”

According to Meiers, Hawaii’s hospitals are in the second phase of a three-phase movement in which institutions, both large and small, are refocusing their missions, paring themselves down and eliminating services. (Earlier this year, St. Francis Healthcare Systems announced the elimination of 150 jobs in an effort to trim $5 million dollars by merging the administrative staffs of its Liliha and West Oahu facilities. Straub announced layoffs of 150 two years earlier.) This follows the first phase, which was spending down reserves and precedes the third phase, which is to close up shop.

“We are realizing that we can no longer take specialty areas on a broad base,” Awaya says. “It will be a matter of finding our niche and being very good at it.” In other words, hospitals can no longer be everything to everyone.

While specialization and close cooperation with other facilities have been facts of life for hospitals for years, they have become a priority. According to Awaya, in the coming years hospitals will reach an unprecedented level of merging of services and facilities. (Last February, Kapiolani Medical Center for Women and Children and Straub and Wilcox hospitals announced plans for a merger.) Hospitals may reshape themselves around their areas of excellence. For St. Francis that would be its renowned transplant and renal dialysis programs.

“There aren’t enough resources in the state. There aren’t enough people and personnel,” Awaya says. “The facilities costs and the reimbursement issues are working against everyone.” One hospital, which has sharply focused its offering of services from the day it opened its doors, is the Rehabilitation Hospital of the Pacific. Founded in 1953, REHAB is the only acute-care medical rehabilitation organization in the state. It consists of a 100-bed facility in Liliha along with a statewide network of clinics, which treat patients suffering from one or more of four categories of illness: stroke, spinal cord injuries, traumatic brain injures and orthopedic injuries. REHAB has never been everything to everyone. Last year, the hospital, which earned $60 million in revenue turned a modest profit of six- to seven-tenths of 1 percent.

“We don’t do heart surgery here, never will,” says William O’Connor, president and chief executive officer of REHAB. “In the early days, we were considered the stepchild of the hospital world because there weren’t many patients here and Medicare outlays for acute rehab wasn’t there. That has changed dramatically because of the aging population.”

This isn’t to say that REHAB hasn’t been profoundly affected by the federal cuts. According to O’Connor, 68 percent of his organization’s revenue comes from Medicare reimbursements, which forced him to make administrative cuts of his own in 1997. But a tight focus of services and practicing medicine that doesn’t require large expenditures in high-tech equipment and training, have enabled REHAB to hold the bottom line.

Is the future of Hawaii’s hospitals to become tightly focused niche players like REHAB? Yes and no. Like Awaya, O’Connor believes that Hawaii hospitals have to learn to collaborate more, come together and cooperate in what he calls a “continuum of care.” But he cautions that further reductions of Medicare could devastate his facility.

“This is a Rubik’s cube with 400 sides,” Awaya says. “Balance is so critical. Size, population, competition, resources, getting the technological edge. What if you find your niche but demand drops? Even if you have a big successful program today doesn’t mean that it will be here tomorrow.”

But Meiers believes that Hawaii hospitals have already demonstrated a high level of cooperation merging laundry and incinerator services as well as sharing such resources as mobile MRI (Magnetic Resonance Imaging) units. “Cooperation can only get you so far when Medicare pays only 37 cents on the dollar,” says Meiers. “We’ve already cut all the fat that needs to be cut. The government has to realize that they have to pay their bills.”

Meiers planned on taking his fight to the State Capitol during the legislature’s special session in October. However, with Congress and the rest of the nation focusing on anti-terrorism matters, healthcare issues have taken a back seat in Honolulu and Washington.

Meanwhile, hospital administrators continue to reassess, refocus and cut. “St. Francis is a very caring and charitable hospital. Even when our patients couldn’t afford to pay we’ve been a home to these people,” says Awaya. “It’s our mission to reach the needy. However, you can reach only so far if the dollars aren’t there. You can’t give what you don’t have.”